Tuesday October 23, 03:43 AM
Rewriting the power tax regime
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Possession of adequate power generating capacity, efficient transmission and distribution, and affordability are the key drivers for every nation, regardless of size or population. While the government has undertaken significant steps on all these aspects to boost the energy security of the country, there are a few areas that require further attention to achieve that ultimate goal. Taxes incurred by generating companies form a significant part of power tariff. Of late, the intention of the government has been to ensure that via fiscal incentives, the cost of power is kept at affordable levels. In other words, the intention is to ensure that fiscal incentives granted to power projects are passed on to consumers as much as possible with the adoption of tariff-based competitive bids. Toward this end, customs and excise duty exemptions on the import and manufacture of plant and machinery, respectively, form the edifice of the fiscal incentive scheme. Appended to these are several fiscal incentives under the foreign trade policy, which allows deemed export benefits to power projects of varying capacities. However, it appears that the service tax incurred during the construction of power projects-which forms one of the significant cost lines for developers-is not exempt. As a result, the cost of service tax, applicable at 12.36% of the value of services such as engineering, construction and installation, ultimately makes its way into the power tariff, thereby making power expensive for consumers to some extent. Therefore, the question that begs the attention of government is, should exemption from service tax not be granted to mega and ultra mega power plants just as customs duty and excise duty exemptions? Especially, when all these taxes are levied and administered by the central government, which is also the nodal agency formulating policy on power. Another difficulty that merits consideration (for mega as well as non-mega projects) is that the output of a power plant does not attract excise duty nor does it attract value-added tax or central sales tax. This results in trapping input taxes, on which exemption is not available (viz, input service tax, input VAT/works contract tax, etc). Under a fiscal regime based on the concept of value-added taxes, exemptions are not an acceptable concept. The reason being, where the output is exempt from tax, taxes incurred on the input cannot be set off against the output and, therefore, they remain as a system tax to be ultimately rolled into the price paid for the services or goods procured by the consumer. However, instead of exemption, if the output (ie, electricity) was zero rated, much of the input taxes could have been claimed by the power companies as refund from the government (central government for central levies and state governments for state levies). This would benefit consumers, as the power producer would have had to factor these refunds when arriving at a tariff. The concept of zero rating is prevalent in all countries that have adopted GST or VAT. Even in India, at the state level, sales made to EOUs and SEZs have been declared zero-rated for the same reason. Therefore, perhaps the time is ripe to revisit the concept of exemptions and selectively move toward zero rating until a time India embraces the GST system, which is proposed to be rolled out a few years from now. Another pertinent issue that requires careful consideration relates to the current mega power policy. Notifications issued by the ministry of finance under customs laws, excise laws and the deemed export policy, need to be aligned in terms of the language, the specific situation that they seek to cover and the exceptions. To illustrate: while for customs duty exemption, the notification in force provides a set of criteria, one of which requires a certificate from the ministry of power stating that a project is a mega power project. However, criteria that would govern the ministry of power while issuing such a certificate have not been provided for in the notification, nor is there a policy document which clearly lays down these criteria in the public domain. In conclusion, given the current economic growth and the need for cheap and clean power across all segments to sustain such growth, it is imperative to revisit some of these issues so that the consumer comes out the real winner. -The writer is executive director, BMR & Associates. These are his personal views
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